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Asia’s family financial crisis

Some of Asia's biggest names are being toppled from global rich lists as cracks begin to appear in corporate coffers and family fortunes begin to dwindle. Falling stock markets, slowing economic growth and bad investment choices are taking their toll as the region's leading families are thrust into the spotlight.

One of the most salacious examples has been the ill fortunes of Larry Yung, the 66-year-old chairman of Hong Kong-listed conglomerate Citic Pacific. The company saw two-thirds of its market capitalisation wiped out in just two days of trading.

This followed revelations of unauthorised bets on the Australian dollar which would cost the company nearly $2 billion. Among the management blamed for the decision to invest in such a risky way was his 36-year-old daughter Frances, head of the finance department.

As securities regulators probe disclosure issues related to the revelation and the daughter takes a pay cut, the family's fortunes have taken a significant hit – Yung's own portfolio being diminished by $500,000.

Other family patriarchs have fallen foul of accumulator losses, slumping commodity prices, currency bets, global stock market volatility and falling property portfolios.

In a recent top 50 list of the wealthiest families in Hong Kong, China and Macau, Next magazine charted the falling net worth of some of the region's most established elite.

Tycoon Li Ka-shing, who has a hand in everything from supermarkets and property to electricity and ports across Hong Kong, China, Canada and the UK, has taken a major hit to his personal wealth. His net worth is now estimated at $9.1 billion.

Just one year ago when Forbes printed its annual rich list, the patriarch of the Li family had a fortune estimated at $32 billion. Similarly the fortunes of the Kwok family, namely that of brothers Thomas, Raymond and Walter who run the Sun Hung Kai property empire in Hong Kong, have dropped to $9 billion, with Forbes previously estimating their wealth to be $24 billion in 2008.

It is the latest in a run of bad luck for the previously low-profile family. In recent months, a spat between the brothers has become the focus of public attention after the eldest sibling was ousted from his board seat amid ill health allegations.

The rest of the family closed ranks on the brother in an attempt to maintain a firm grip of control on the property firm as they voiced concern that day to day management was being inappropriately delegated by the eldest brother.

Asian tycoons traditionally keep a tight rein on family businesses, and this latest financial crisis is exposing some of the pitfalls involved. Many maintain majority control of their listed vehicles, a factor which is hitting them hard in their own pockets as stock prices plummet.

Others have been so focused on control of the company that they are prone to be less diligent with their investment advice as perhaps they should be. This is perhaps why some of the big family names have been caught out by risky derivative bets.

"My impression is that the people selling these products are smarter than the people buying them,'' says Jamie Allen, secretary general of the Asian Corporate Governance Association. One of the biggest pitfalls of tight family shareholding or control is the lack of transparency this tends to bring in Asia, he noted.

While it is clear from disclosure records how much companies are losing on paper, it is more difficult to gauge how bad things are behind the scenes.

In the Citic Pacific case for example it took a number of months before the losses were brought to light, the chairman claiming he had been ignorant of the investments. Allen finds this difficult to believe. "I think in a sense we have to look at the people, the corporate culture of the people, the quality of the information they are putting out and what they are not saying," he explained.

In many Asian family businesses, there is still an inherent distrust of outside management, which compounds this problem. "It's quite hard in this work culture,'' Allen continues. "A lot of management hired by family companies don't know what's going on.''

This is echoed by Howard Gorges, vice chairman of South China Brokerage. In terms of how family-run businesses in Asia are likely to emerge from the financial crisis, he said: "The easy answer to that is you have the year's profits coming in – so we can see what might be lurking there.''

Tight family ownership of major companies is generally more widespread in Asia than in Europe and the US, according to a 2000 study by academics at the Chinese University of Hong Kong. The research by Larry Lang and Leslie Young found that eight major family groups in the region controlled more than a quarter of all listed companies in Asia.

The list compiled by Next reflects this: the leading Hong Kong losers in the financial crisis are a relatively small group of families. Among those notably not even making the list is casino tycoon Stanley Ho, who maintains a tight grip on his entertainment empire. Ho's daughter is responsible for much of the management.

A glut in casino infrastructure in Macau has left a number of major casino operators scrambling to meet debt obligations. While Ho appears better positioned to deal with the crisis, his portfolio will face erosion as the Macau bubble bursts.

Likewise in Malaysia, it is the big families who appear to be losing out on a grand scale. The country's richest man, Robert Kuok, owner of Shangri-La hotel group, has seen his wealth fall by up to $7.7 billion. much of this due to accumulator losses.

Tan Sri Syed Mokhtar Al-Bukhary has also seen his personal portfolio fall amid concerns at his flagship MMC Corp Bhd that the company has been buying assets he owns.

As questions are raised over related-party transactions, the fortunes of his other companies, Tradewinds Corp Bhd and DRB-Hicom Bhd have meanwhile been lackluster.

Looking ahead, ACGA's Allen believes one of the biggest challenges for shareholders in family-run companies will be getting sufficient information to make wise investment choices.
"Managing risk well and being open in admitting problems is a challenge (for family-run firms),'' he notes.

"There are an awful lot of companies that never tell the market about problems. In some ways, a litmus test is going to be how they issue bad news voluntarily.'' 

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